American International Group (AIG) Misses on Q4 Earnings

American International Group Inc. AIG reported fourth-quarter 2016 operating income of 84 cents per share that missed the Zacks Consensus Estimate by 48%. Earnings compared favorably with the prior-year quarter loss of $1.10 per share.

Total general operating and other expenses decreased 9.6% year over year to $2.5 billion due to the company’s cost-reduction initiatives. Lower loss adjustment expenses, advisory fee expenses and marketing and acquisition costs drove the improvement.

Quarterly Segment Highlights

Commercial Insurance

Net premiums written were down 20% year over year to $3.7 billion due to strategic portfolio actions and premiums ceded under the previously announced Swiss Re quota share transaction.

Combined ratio of 241.6% deteriorated 5530 basis points year over year, due to an increase in loss ratio which was impacted by adverse reserve development..

The segment’s pre-tax operating loss of $5 billion widened from a loss of $2.4 billion in the prior-year quarter.

Consumer Insurance

Net operating revenues inched up 0.7% year over year to $6 billion due to growth in personal insurance net premiums written and increase in group retirement and life insurance revenues.

Pre-tax operating income of $970 million increased 55.8% driven by the significant improvement in underwriting results in Personal Insurance and higher income from alternative investments in hedge funds across all Consumer Insurance operating segments.

At the end of 2016, the insurer’s adjusted book value per share (excluding AOCI and DTA and including dividend growth) dipped 0.6% year over year to $58.57.

For 2016, return on equity (ROE) was 0.6%, down 310 bps year over year. This was due to a steep decline in after-tax operating income.

Share Buyback and Dividend Update

For 2016, AIG returned a total of $13.1 billion of capital to shareholders.

The company repurchased 47.5 million common shares for $3.0 billion and 2.4 million warrants for $46.0 million during the fourth quarter.

Through Feb 14, 2017, the company has repurchased an additional 18.4 million common shares for $1.2 billion.

On Feb14, 2017, The Board of Directors authorized an additional increase of $3.5 billion to its previous repurchase authorization that resulted in an aggregate remaining authorization of approximately $4.7 billion.

Our take

The company’s 2016 results reflected efforts to return to profitability. This is evident from number of measures taken in this regards, such as reduction of cost, divestment of non-core units, increase in share buyback, entrance into reinsurance transactions, to name a few. Though the company’s results missed estimates, it performed well on a year-over-year basis. Given the restructuring initiatives being undertaken, we expect the company to post strong results in the coming quarters.

Among the other players from the insurance space that have reported their fourth-quarter earnings so far, the bottom line at Progressive Corp. (PGR), The Travelers Companies, Inc. (TRV) and RLI Corp. (RLI) beat their respective Zacks Consensus Estimate.

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